Ballard Spahr LLP: NCAA Cannot Bar Compensation of Student-Athletes for Use of Their Names and Likenesses, Federal Court Says

By Stephen J. Kastenberg and Marcel S. Pratt

A recent California federal court decision has further lifted the thumb on the scales that has historically benefited collegiate athletics in weighing whether their association rules violate the federal antitrust laws. In so doing, the court ruled that antitrust laws prohibit the National Collegiate Athletic Association (NCAA) from imposing rules that prevent college athletes from receiving a share of the revenue that the NCAA and its member schools earn from the sale of licenses to use the students’ names, images, and likenesses in video games, live game telecasts, and other footage, according to a California federal court. This rule continues a trend away from the greater deference afforded college athletics. Ballard Spahr has represented colleges and leagues in antitrust counseling and litigation regarding athletics and other cooperative conduct.

If there is no stay or reversal of the order, it will undoubtedly have a significant impact on how NCAA member schools recruit athletes in the future. Colleges and universities are sure to face a wide variety of legal issues and risks as they try to structure competitive revenue-sharing programs to compensate student-athletes. Students and their counsel may also be encouraged by the decision to challenge other college practices involving cooperation with other schools, whether through athletic leagues or otherwise.

After a three-week bench trial, Judge Claudia Wilken issued a 99-page opinion concluding that the NCAA’s challenged rules unreasonably restrain trade in the college education market [O’Bannon v. NCAA, No. C 09-3329 CW, N.D. Calif. Enhanced opinion available to lexis.com subscribers]. Judge Wilken found in favor of the plaintiffs, who are current and former Division I basketball players and Division I football players in the Football Bowl Subdivision (FBS). The NCAA’s rules constituted a price-fixing agreement among its member schools, which the court – following precedent benefiting amateur collegiate athletics – analyzed under the rule of reason balancing test, rather than condemning as per se unlawful. The court did not fully lift NCAA restrictions in this area, however.

NCAA member schools are competitors in the market to provide goods and services to elite football and basketball recruits, such as scholarships and high-quality athletic programs. Due to the NCAA’s rules, a recruit pays a fixed price in the form of permission to use his name, image, and likeness, which is credited no additional value in the transaction. If a school lowered this “price” by offering deferred payment, a cash rebate, or other compensation, it could be sanctioned by its competitor schools, which act through the NCAA. Student-athletes suffer antitrust injury under the NCAA’s rules, according to the court, because certain schools would have offered the recruit a higher market price.

The NCAA convinced the court, however, that some restrictions on student-athlete compensation yield procompetitive benefits, such as protecting consumer demand by preventing schools from paying student-athletes large sums of money (i.e., preserving the “amateurism” of college sports) and ensuring that compensation does not interfere with educating student-athletes and integrating them into academic communities.

The plaintiffs identified two alternatives for achieving the NCAA’s goals that were less restrictive than the NCAA’s current rules, however. First, the NCAA could permit FBS football and Division I basketball schools to award stipends to student-athletes up to the full “cost of attendance,” which the NCAA’s bylaws define as the total cost of tuition and fees, room and board, books, and “supplies, transportation, and other expenses related to attendance,” which athletics-based financial aid may not cover. Second, the NCAA could permit its schools to hold in trust “limited and equal shares of its licensing revenue” to be distributed to its student-athletes after they leave college or their athletic eligibility expires. Holding this revenue in trust until after student-athletes leave school minimizes any potentially negative impact on consumer perception and demand. “Permitting schools to award these stipends and deferred payments would increase price competition among FBS football and Division I basketball schools in the college education market . . . without undermining the NCAA’s stated procompetitive objectives,” the court found.

Consequently, the court permanently enjoined the NCAA from enforcing any rules that prohibit its member schools and conferences from offering their FBS football or Division I basketball recruits: (1) to pay a limited stipend derived from the use of their names or likenesses; or (2) to deposit a limited share of licensing revenue in trust, payable when the athletes leave school or their eligibility expires. The court also allowed the NCAA to establish certain caps on the amount to be paid and held in trust.

The court rejected the plaintiffs’ third proposed alternative, which would have allowed student-athletes to receive money for commercial endorsements. “Allowing student-athletes to endorse commercial products would undermine the efforts of both the NCAA and its member schools to protect against the ‘commercial exploitation’ of student-athletes,” the court said.

The injunction takes effect at the start of the next FBS football and Division I basketball recruiting cycle, which does not affect any student-athletes enrolling in college before July 1, 2016. The NCAA may appeal the decision to the U.S. Court of Appeals for the Ninth Circuit, although the district court ruled that the injunction will not be stayed pending any appeal of its order. (The NCAA can still seek such a stay from the appeals court.)

For more information, please contact Stephen J. Kastenberg at 215.864.8122 or kastenberg@ballardspahr.com, or Marcel S. Pratt at 215.864.8287 or prattm@ballardspahr.com.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

For more information about LexisNexis products and solutions, connect with us through our corporate site.